Issue for Consideration
Section 68 of the Income-tax Act, 1961 deems
unexplained cash credits to be the income of the assessee under certain
circumstances. Section 68 reads as under:
“Where any sum
is found credited in the books of assessee maintained for any previous year,
and the assessee offers no explanation about the nature and source thereof or
the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the sum so credited may be charged to income tax as the income of
the assessee of that previous year.”
The section, for its application, apparently
requires that a sum is found credited in the books of account of the assessee. An
issue has arisen before the courts as to whether unexplained receipts or
credits can be deemed to be the income of the assessee u/s. 68, even in a
situation where books of account are not maintained or the sum is not credited
in the books of account of the assessee. In an earlier decision, the Bombay
High Court (followed by the Gauhati High Court and the Madras High Court) has
taken the view that such amounts, not found credited in the books of account,
cannot be treated as cash credits taxable u/s. 68. Recently, the Bombay High
Court has however, taken a contrary view that such amounts can be taxed under
section 68.
Bhaichand N. Gandhi’s case
The issue first arose before the Bombay High
Court in the case of CIT vs. Bhaichand N. Gandhi 141 ITR 67.
In this case, pertaining to assessment year
1962-63, where the previous year was Samvat year 2017, the assessing officer was
not satisfied with the explanations offered by the assessee regarding the
genuineness of certain cash credits totalling to Rs. 30,000 found recorded in
certain books, which, according to the assessing officer, were the books of
account of the assessee. He, therefore, treated the amount of such credits as
income from undisclosed sources. The Appellate Assistant Commissioner confirmed
the addition of such credits as income of the assessee.
Before the Tribunal, an argument was put
forward on behalf of the assessee that in respect of one of the deposits of Rs.
10,000 included in the amount of Rs. 30,000, that it was not an amount credited
in the books of the assessee maintained by the assessee for the previous year,
but was only a deposit in the bank account of the assessee. It was contended
that the bank passbook was not a book maintained by the assessee, and that
therefore, even if such amount was treated as undisclosed income of the
assessee, it could only be assessed in
the financial year of the deposit (as applicable to unexplained
investments/money u/s. 69/69A), and not in the previous year.
The Tribunal accepted the assessee’s
argument holding that the bank passbook could not be treated as a book of the
assessee, and that it was not a book maintained by the assessee for any
previous year as referred to in section 68.
On an appeal by the Revenue, the Bombay High
Court analysed the provisions of section 68. It took note of the decision of
the Supreme Court in the case of Baladin Ram vs. CIT 71 ITR 427, where
the court had held that it was only when an amount was found credited in the
books of an assessee that the new section would be attracted. It further
observed that it was well settled that the only possible way in which income
from an undisclosed source could be assessed or reassessed, was to make an
assessment during the ordinary financial year. The Supreme Court had noted that
even under the provisions embodied in section 68, it was only when any amount
was found credited in the books of the assessee for any previous year that the
section would apply, and the amount so credited might be charged to tax as the
income of that previous year, if the assessee offered no explanation or the
explanation offered by him was not satisfactory.
The Bombay High Court noted with approval
the observations of the Tribunal that it was fairly well settled that when
monies were deposited in a bank, the relationship that was constituted between
the bank and the customer was one of debtor and creditor and not of trustee and
beneficiary. Applying this principle, the passbook supplied by the bank to its
constituent was only a copy of the constituent’s account in the books
maintained by the bank. The passbook was not maintained by the bank as the
agent of the constituent, nor could it be said that the passbook was maintained
by the bank under the instructions of the constituent. The Bombay High
Court, therefore, held that the Tribunal was justified in holding that the
passbook supplied with the bank to the assessee could not be regarded as a book
of the assessee, i.e. a book maintained by the assessee or under his
instructions.
The Bombay High Court, therefore,
confirmed the conclusions of the Tribunal, holding that the provisions of
section 68 did not apply to the credit in the passbook, which was not recorded
in the books of account of the assessee.
In the case of Anand Ram Raitani vs. CIT
223 ITR 544, the Gauhati High Court took a view that existence of books of
account was a condition precedent for the invocation of power by the assessing
officer u/s. 68. Since a partnership firm was a separate entity, books of
account of a partnership could not be treated as those of individual partners.
Therefore, addition to an assessee’s income on account of unexplained cash
credit u/s. 68, on the basis of cash credit found in books of accounts of a
firm in which the assessee was a partner was not justified. The court in
deciding the case followed the decision in the case of Smt. Shanta Devi vs.
CIT, 171 ITR 532(P& H).
Similarly, in the case of CIT vs. Taj
Borewells 291 ITR 232, the Madras High Court, considered a case of the
first year of assessment of a partnership firm, where no books of account were
maintained, but accounts were presented in the form of profit and loss account
and balance sheet. The Madras High Court held that the profit and loss
account and balance sheet were not books of account as contemplated u/s. 68. It
held that since there were no books of account, there could be no credits in
such books, and therefore the provisions of section 68 could not be invoked to
tax capital contributions of partners in the hands of the firm.
Arunkumar J. Muchhala’s case
Recently, the issue again came up before the
Bombay High Court in the case of Arunkumar J. Muchhala vs CIT 85 taxmann.com
306.
In this case,
the assessee had income from rent, share of profit from a partnership firm,
salary income and income from other sources. The assessee had taken loans from
various parties totalling to Rs. 79.06 lakh. Since no loan confirmations were
provided in respect of these amounts, the assessing officer treated them as
unexplained cash credits and added them to the total income of the assessee.
In appeal before the Commissioner (Appeals),
explanations were given in respect of some of the loan amounts, for which
additions were deleted. However, no relief was given in respect of the other
amounts for which no further explanations or details were filed. The further
appeal of the assessee was dismissed by the tribunal.
Before the Bombay High Court, on behalf of
the assessee, it was argued that books of account had not been maintained by
the assessee, and therefore the provisions of section 68 would not apply. It
was claimed that though it was a fact that certain amounts had been taken by
the assessee from those persons, yet, when entries of these amounts were not
taken in the books of account, they could not be added to the income of the
assessee. These entries were only found by the assessing officer in the bank
statement, and no other document was considered by him while passing the
assessment order.
Reliance was placed on behalf of the
assessee on the decisions of the Supreme Court in the case of Baladin Ram
(supra), of the Bombay High Court in the case of Bhaichand H Gandhi
(supra), of the Gauhati High Court in the case of Anand Ram Raitani(supra)
and of the Delhi High Court in the case of CIT vs. Usha Jain 182 ITR 487. It
was argued that section 68 was a charging section and was also a deeming
provision. Further reliance was placed on the decision of the Madras High Court
in the case of Taj Borewells (supra). It was further argued that the
amounts were received by cheques, and that some of them were in respect of flat
bookings, which did not materialise, and therefore, cheques were returned and
there was no credit at the end of the year.
On behalf of the Revenue, it was argued that
many opportunities were given to the assessee to produce relevant documents in
order to substantiate and prove his version, but that the assessee had failed
to give the further details of the persons from whom the loans were allegedly
taken. It was argued that it was the bounden duty of the assessee to explain
the nature and source of cash deposits, and that it had therefore rightly been
held that the assessee could not take advantage of the fact that he had not
kept any books of account.
Reliance was placed on behalf of the Revenue
on the decision of the Punjab & Haryana High Court in the case of Sudhir
Kumar Sharma (HUF) vs. CIT 224 Taxman 178, the special leave petition
against which decision had been rejected by the Supreme Court.239 Taxman
264(SC).
The Bombay High Court observed that the
assessee had not denied that he had received the loan amounts/cash deposits
from those persons whose names had been given in the assessment order and that
those names had been taken from the bank account of the assessee. The High Court
observed that the assessee’s case was that since he had not maintained books of
account, those amounts could not be considered. The Bombay High Court observed
that when the assessee was doing business, it was incumbent on him to maintain
proper books of account. Such books could be in any form. According to the
Bombay High Court, if he had not maintained the books which he was required to,
then he could not be allowed to take advantage of his own wrong. The Bombay
High Court observed that the burden lay on the assessee to show from where he
had received the amounts, and what was their nature and the onus was on the
assessee to explain those facts.
The Bombay High Court noted that huge
amounts had been credited in the account of the assessee, and he had not
explained the nature of those credits. The fact of those amounts was discovered
by the assessing officer from the bank passbook. When the source and nature had
been held to have been explained, certain amounts had been deleted by the
appellate forums. In respect of the balance amounts of Rs. 58 lakh, no document
was produced in respect of those transactions, nor amounts had been confirmed
from those persons who were shown to have lent them. Therefore, according to
the Bombay High Court, the authorities below had rightly held that the nature
of the transaction had not been properly shown by the assessee.
According to the Bombay High Court, the
ratio of the decisions relied upon on behalf of the assessee were not
applicable to the case before it. In those cases, either the entries were
confirmed by the parties in whose name they were standing, or books of account
were showing the cash credits.
The court observed that in the case before
it, at no earlier point of time had a firm stand been taken by the assessee
that he had not maintained the books of account. Whenever a direction had been
given to produce the same in any form, the assessee had replied that he wanted
time to prepare. Many opportunities were given by the assessing officer for the
production of relevant documents, including books of account. However, such
documents were never produced. The assessee had raised the point of books of
accounts not being maintained for the first time before the Bombay High Court.
The Bombay High Court observed that non-production of documents was different
from non-maintenance of books of account. The Bombay High Court observed that
the facts in Sudhir Kumar Sharma’s case (supra) were almost similar, and
that case was, therefore, binding. It also noted that the special leave
petition of the assessee in that case to the Supreme court was dismissed by the
court.
The Bombay High Court, therefore, upheld the
addition made by the assessing officer of such amounts as unexplained cash
credits u/s. 68.
Observations
Section 68 while referring to the books
of account requires that (i) such books of account are ‘maintained’ (ii) by the
‘assessee’ and (iii) the assessee is ‘found’ (iv) to have ‘credited’ any sum
therein and (v) such finding, needless to say, is by the assessing officer.
Each of these requirements, are to be fulfilled for a valid charge u/s. 68. The terms referred to have their own meanings and their import
cannot be wished away in applying the provisions. The onus is heavy on the
assessing officer to establish strict compliance of each of the conditions
stated herein, before invoking and applying section 68 for an addition of the
deemed income. In a few cases, the courts have concurred that a pass book of a
bank cannot be construed to be maintained by the assessee and the bank cannot
be held to be an agent of the assessee.
There has been a special significance
attached to the books of account in the Act and the requirement for recording a
transaction or a write off with reference to the books of account has been
subjected to the examination by the courts, which have held that a deduction
based on the condition of an entry in the books of account would be conferred
only where the assessee has recorded the entry in the books and not otherwise;
a debit in the profit and loss account without supporting books would
disentitle an assessee from claiming the deduction. Please see National
Syndicate, 41 ITr 225(SC), S. Rajagopala Vandayar, 184 ITR 450(Mad.) and P.
Appuvath Pillai,58 ITR 622(Mad.), as a few examples.
Section 2(12) of the Income-tax Act defines
the term ‘books or books of account’ as including ledgers, day-books, cash
books, account-books and other books, whether kept in the written form or as
print-outs of data stored in a floppy, disc, tape or any other form of
electro-magnetic data storage device. Accordingly, a reference in section 68 to
books of account has to be given a meaning that is due to it keeping in mind
the definition of the term contained in the provisions of section 2(12)of the
Act. There is nothing in section 2(12) that indicates that a recording outside
the books would be construed to be the books of account.
The Bombay High Court in Bhaichand H.
Gandhi’s case, has said and confirmed what has been said above in so many words
and we do not think that there is any reason to differ from the ratio of the
said decision. Importantly, the court in Arunkumar J. Muchala’s case has
not expressly dissented from its earlier decision; it has rather chosen to
highlight the following distinguishing facts in the latter case;
u The
assessee was a businessman and was required to maintain the books of account,
u The
assessee had not maintained the books of account which he was required to
maintain,
u The
assesee was claiming the benefit of his own action which was not permissible in
law,
u The
assessee had at times pleaded that he was in the course of preparing the books
of account and would produce the same when ready, indicating that he was
otherwise required to maintain the books of account,
u The
assessee had for the first time taken a fresh plea before the high court that
the provisions of section 68 were not applicable, as he was not maintaining the
books of account and as a result, the lower authorities were deprive of
examining the facts and the merits of a fresh plea.
In Arunkumar J. Muchhala’s case, the
Bombay High Court has not entertained or has ignored the contention raised by
the assessee that he had not maintained the books of account. The Bombay High
Court’s decision seems to have been based on its disbelief of the assessee’s
arguments as on this aspect, and there was no fact-finding by the lower
authorities.
The main basis of the decision of the Bombay
High Court in Arunkumar J. Muchhala’s case, was that an assessee had
committed a wrong by not maintaining the books when he was required by law and
hence, cannot take advantage of his own wrong. The Bombay High Court has
observed that it was incumbent on the assessee to maintain proper books of
account when he was doing business. From the facts as stated earlier, it
appears that the assessee was not carrying on business himself, but was a
partner of a partnership firm. In that event, there was no statutory obligation
for the assessee to maintain his books of account. That being the position, it
cannot be said that the assessee was wrong in not maintaining books of account.
This aspect could have been explained to the court by the assessee with a
little more precision.
The Bombay High Court, while rejecting the
cases cited in support of inapplicability of section 68 including its own
decision before it in Arunkumar J. Muchhala’s case, has observed that in
those cases, either the entries were confirmed by the parties in whose name
they were standing, or books of account were showing the cash credits. It is
very respectfully pointed out that in all those cases, when one reads the
facts, no books of account were maintained by the assessee, nor were
confirmations available, and therefore, those decisions were delivered purely
on the principle that, where, admittedly books of account were not maintained
by the assessee, the provisions of section 68 would not apply.
The Bombay High Court in Arunkumar J.
Muchhala’s case, has decided the issue largely based on the decision of the
Punjab & Haryana High Court in the case of Sudhir Kumar Sharma (HUF)
(supra). If one examines the facts of that case, it is gathered that it was
not the case where books of accounts were not maintained. In response to
various questions by the assessing officer, the assessee’s representative had
replied that records were as per books of account, that details would be
checked with the books of accounts and provided, etc. The assessing
officer had observed that books of account were not produced. According to the
Commissioner (Appeals), the answer by the assessee to these questions of
assessing officer clearly showed that the assessee had maintained books of
accounts. Though the assessing officer made the additions on the basis of
deposits in the bank account, the Commissioner (Appeals) had held that this
would be tantamount to additions made on the basis of entries in the books of
account, since such deposits/credits would also appear in the books of account
of the assessee, which were not produced before the assessing officer. Accordingly,
the provisions of section 68 were held to be applicable in that case, on a
clear cut finding by the authorities that the assessee had maintained the books
of account. In the circumstances, the exclusive reliance on a decision with
contrary facts by the court in Arun Muchala’s case seems to be a case of
misunderstanding of the facts which understanding of facts could have been
provided by the assessee with a little
application in his own interest.
It is therefore appropriate to hold that
the decision of the court in Arunkumar J. Muchala’s case, should be
considered as one of its kind, delivered on the facts of the case, and not
laying down the rule of law.
In Baladin Ram vs. CIT (supra), a case decided under the Income-tax Act, 1922, but delivered after
the Income-tax Act, 1961, was enacted, the Supreme Court in the context of
section 68 observed:
“Even under the
provisions embodied under the new Act, it is only when any amount is found
credited in the books of an assessee that the section will apply. On the other
hand, if the undisclosed income was found to be from some unknown source or the
amount represents some concealed income which is not credited in his books, the
position would probably not be different from what was laid down in the various
cases decided when the Act was in force.”
In Taj Borewell’s case (supra), the
Madras High Court held as under:
“Unless the following circumstances
exist, the revenue cannot rely on section 68 of the Act:
(a) credit in the books of an
assessee maintained for the year;
(b) the assessee offers no
explanation or if the assessee offers explanation and if the assessing officer
is of the opinion that the same is not satisfactory, the sum so credited is
chargeable to tax as “Income from Other Sources”.
From these decisions as well as the language
of the section, it is clear that in the absence of books of account, section 68
would not apply.
The applicability of section 68 vis-à-vis
books of account was examined in the cases of Smt. Shanta Devi Jain, 171 ITR
532(P&H), Smt.Usha Jain, 182 ITR
487(Delhi) and Sundar Lal Jain, 117 ITR 316(All), in favour of
assessee besides the above referred and discussed cases. The Third Member of
the Tribunal in the case of Smt. Madhu Raitani, 45 SOT 23(Gau.) also
held that the provisions of section 68 were applicable in cases where the
assessee had maintained the books of account.
Therefore, the view appearing from the two
apparently conflicting decisions of the Bombay High Court is that in a case
where, admittedly, books of account are not maintained or the entry is not
appearing in the books of account, the provisions of section 68 would not
apply; however, in a case where the facts indicate that books of accounts are
maintained, but are not produced before the authorities, the provisions of
section 68 can be invoked on the assumption that entries in the bank statements
must have been recorded in the books of account.
Therefore, the principle laid down by the
Bombay High Court in Bhaichand H. Gandhi’s case would still continue to
be applicable. _
